Column : A year to forget

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With Chidambaram back in finmin, reforms were revived. But the UPA may not reap the fruits of its belated good actions

Football, as they say, is a game of two halves. The year that has just ended was a year with a dismal first three quarters and a better last quarter. We are not out of the woods yet, but there may yet be the end of the tunnel not too far away.

The eurozone came near to breaking up or at least ejecting Greece. Various dire threats were issued, elections held, which threatened the worst. But, in the end, the misery, which is endless, was given renewed support. Greece will take the poisoned chalice and drink it. A whole generation of Greek youth will have their lives blighted. The European Central Bank (ECB) became the only authority among many others that was decisive. Its proposal of bailing out countries if they asked for help was a brilliant confidence trick. No country would be likely to ask for such help as it would indicate to the markets that bankruptcy was imminent. Markets would act faster than the ECB and, hence, no country, not even Spain, asked for help. The ECB is a class central bank and knows a trick or two.

Yet the longer-run prospects for the eurozone are dim. None of its structural problems are resolved. A tighter fiscal union would suit the northern countries if it did not bind them to rescue the weaker southern members. There is no proposal to have a eurozone-wide tax that could be used for transfer payments, which is what is needed. The eurozone is an experiment in Hayeks proposal of a denationalised money and there is a lot of learning for the eurozone countries to do as to how to live in a renewed Gold Standard without discoveries of gold deposits in California or Australia to ease the burden of deflation. What we have, instead, is a Banking Union, which gives the ECB the right to supervise 6,000 banks in the eurozone. We will see if it works.

The UK has a plan to eliminate its budget deficit over five years and it is quite clear that the recession in its neighbouring countries is delaying the recovery. Even so, the UK can print its own money and has been doing so. Like in the US, the Quantitative Easing (QE) has had dubious success. The only argument for it is the counter-factual one that without QE things would have been worse still. Emerging economies such as Brazil see as a dumping strategy which exports the woes of UK/US abroad. QE is also delaying deleveraging by giving zombie firms and households, who are technically bankrupt, a false hope that they will survive.

The US had a slow three quarters and unemployment fell rather reluctantly. But Obamas re-election reduced the uncertainty ahead. As of the time of writing with three days to go there is still no solution to the fiscal cliff. I have always held that falling over the cliff would be a wake-up call to the smug American political establishment. It will have to get to grips with its debt burden seriously and come up with a credible long-term plan. But with the next Congressional elections only two years away, short-termism is more likely to win than statesmanship. It will add to the narrative of America slipping down the league table unless fracking comes to its rescue.

India has seen the GDP growth rate slipping down to the nether zones below 6%. Again, the UPA wasted the first eight months as it did the entire last year. But, after Pranab Mukherjees elevation to the Presidency, the old team of P Chidambaram and Manmohan Singh was back in harness with a sense of urgency. The NAC tug is still there with its spending plans and Aadhar will add to the subsidies rather than replace them. Even so, FDI in multi-brand retail was passed with the UPA finally calling Mamatas bluff, albeit 12 months too late. But banking reform is through and, hopefully, disinvestment will get off the ground to dent the deficit.

The balance of probabilities is still rather fine and the UPA may not reap the fruits of its belated good actions. As with the NDA in its 2004 defeat, the fruits of good deeds may go to the other party. The only question is about the identity of that party. It was to be a coalition of small Third parties until recently. Narendra Modis re-election for a fourth term even with a slightly-reduced majority has changed the odds. It could be that the BJP will gamble on Modi bringing in 30 or more extra seats from urban India as Manmohan did in 2009. If so, the recovery of GDP growth rate, when it comes, will only strengthen Modis reputation as a man who delivers. That is not what the Congress would like, but then who said economics is a kind subject